Ontario's back is to the wall

There is something of Ontario's recent history in the story of Raul Arancibia's life.

The 53-year-old forklift operator was laid off last May when his employer of 18 years, Canac Kitchens, took a look at the flat-lining U.S. housing market and opted to consolidate its production at a plant in North Carolina.

It took months for him to negotiate the complex rules of employment insurance and to begin to collect payments and, even then, they won't last as long as they would if he lived in another province. His union helped him to upgrade his skills, but every time he applies for a job, he finds he's in the company of several dozen others.

Carlo Taormina who lost his job at US Steel in Hamilton in December, looks over a brochure outlining a heavy machinery course which he will be taking starting in February. (Glenn Lowson for The Globe and Mail)

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There are tens of thousands of similar stories in Canada's most populous province, which is dealing not only with the economic crisis that has raged since last autumn but also with a profound structural change in the key manufacturing sector. Ontario remains the country's 800-pound gorilla by virtue of its size, but most economic indicators show that it is in distress. The question posed last summer by the TD Bank  "Are the wheels falling off the Ontario economy?"  has been answered in the affirmative.

And, on the eve of Finance Minister Jim Flaherty's pivotal budget presentation on Tuesday, there are loud calls from economists, government officials and business leaders for the federal government to recognize Ontario's plight  if only out of its own self-interest.

"Given the fact that Ontario is still 40 per cent of the economy, as Ontario goes, so goes Canada," said provincial Finance Minister Dwight Duncan, whose job may be even more difficult than Mr. Flaherty's. His own budget later this winter is expected to post a multibillion-dollar deficit that reflects plummeting revenues and the political reality that he has to pay for increasingly expensive health and education services.

Ontario's situation is different from provinces whose fortunes are suffering because of a global slump in commodity prices, such as Alberta. The arc of Ontario's decline can be traced to the crumbling in the past decade of the pillars of its industrial base. The U.S.-Canada Auto Pact, which spurred the growth of the auto industry in Ontario after 1965, was overruled in 1999 by the World Trade Organization. (At that point, Canada had a $22-billion auto trade surplus in vehicles and parts, but it's now in a global deficit by nearly $15-billion.) Two years later, in the wake of 9/11, the relatively free access to the U.S. market that had begun with the 1988 bilateral trade pact and had accelerated with NAFTA in 1994, began to erode, as Washington chose security concerns over commercial interests at every opportunity.

These developments, combined with surging energy prices and a strong Canadian dollar, shook Ontario's economic foundations. In the past five years, more than 200,000 manufacturing jobs have disappeared and 10,000 more in the forestry sector. And, as Bruce Springsteen lamented 25 years ago about the U.S. Rust Belt, the "foreman says these jobs are going, boys, and they ain't coming back."

In recent months, oil prices have fallen and the dollar has weakened, but slumping demand in the United States for almost everything has dealt a new blow to Ontario. The long-term trend toward globalization  seeking out lower-cost jurisdictions  has been interrupted as multinational companies seek to cut their manufacturing capacity. Many are opting to consolidate production in high-wage areas simply because they don't have the time to develop a greenfield operation in a developing nation. Volvo Construction Equipment, for example, is moving its operations from Goderich, Ont., to the United States at a cost of about 500 jobs.

David Pecaut, senior partner at Boston Consulting Group and chair of the Toronto City Summit Alliance, estimates that more than a thousand location decisions are up for grabs, with no certainty how many of them Ontario will win. "The next 18 months will be one of the most profound chapters in the history of manufacturing in Canada," he said.

Ontario's economic statistics are not encouraging. Its GDP grew by an estimated 0.1 per cent in 2008 and private-sector economists forecast pretty much the same this year. The unemployment rate, 7.2 per cent, is above the national average of 6.6 per cent and is only that low because of what Statistics Canada calls "involuntary part-time workers"  those who would prefer full-time work but can't find it.

The province's average wage, $22.40, is the second-highest in the country (after Alberta) but it is falling back to the pack in other ways. Dale Orr, an economist at Global Insight, notes, for example, that Ontario's GDP-per-capita ratio was 5 per cent above the Canadian average in 2007 but is expected to be 3 per cent this year and will be even closer to the average in 2013.

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